Game Plan – 3/27/09

The Elephant in the Room
Nice rally, but there is a small problem (click to enlarge):

Looking at this chart, it is easy to see why the market bottomed in October 2002: the economy had resumed growth. Growth; remember that?

The chart also shows how this recession makes the last one look like an itsy bitsy little blip. What are the chances that this bear market bottoms sooner than the last one? Zero!

The megaphone patterns on the IWM and QQQQ that I mentioned yesterday certainly didn’t turn out to be bearish. And neither did this one that popped up on the SPX 5-minute chart Thursday afternoon:

Nevertheless, these are chaotic patterns that don’t belong on any self-respecting rally chart. If the SPX had made a nice bullish ascending triangle pattern before it took out 826.84, I wouldn’t be critical. But this slop? Bah!

I think these megaphones are an indication that there isn’t a steady bid under the market, and a sign that the topping process has begun.

Vix Falling Wedge
The Vix has a bullish falling wedge pattern developing on its 60-minute chart:

That’s bullish for the Vix, and bearish for stocks. The last time I posted such a chart was on January 27th. The SPX made a top the next day. This pattern isn’t as perfectly formed as the last one, but it is another sign that we may be approaching a top.

R2K Drama
Here is a weekly chart of the Russell 2000:

Notice how the late October 2008 rally topped out at the 61.8% Fibonacci level (blue line and blue arrow.) Now the R2K is approaching the 78.6% level (red line and red arrow) which is at 454.24. So, the R2K may only be ten points away from an epic resistance level.

It is very unusual for the McClellan Oscillator to get so overbought and stay that way for so many days. I wouldn’t be long here with Larry Kudlow’s money.

Support levels:
826.84 – (New) The top of the Gap of Doom, and prior resistance.
804.00 – This level has been weakened and can’t be counted upon.
797.00 – Still in play, but weakened also.
791.37 – Wednesday’s intra-day low.
780.00 – Was resistance before the plunge to 666.
768.54 – The Geithner Gap from Monday morning.
752.44 – November 20th low close.

Resistance levels above are:
839.43 – The final resistance level before the Gap of Doom on Feb 13.
851.00 – (New) Was resistance on Jan 26th and Feb 4th.
875.01 – The February 9th peak.

Other Important Levels
800.58 – Weekly low close from 2002 (October).
815.26 – Monthly low close from 2002 (September).
823.09 – A close above makes a monthly bullish engulfing candle.
826.84 – Gap of Doom. A weekly close below would be a red flag.
828.51 – 78.6% retracement from Feb 9th peak using closing prices.
830.45 – Ditto, but using the extreme high and low.

Holding above the 78.6% retracement level will convince many traders that a run to 875 is likely.

If you have any other important levels we should keep an eye on, please post them in the comments.